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The Importance of Unit Linked Insurance Plans

What is a ULIP and what are its advantages?

Most people today are on the lookout for additional and convenient means of enhancing their incomes. The most obvious corollary would be to invest one's money with the expectation of profitable returns, but investments are as prone to depreciation as they are to appreciation. With an investment, one must accept whatever returns it brings, whether lucrative or not, to add to which investments may also require the constant and proactive attention of the investor, which the investor might not be able to commit.

Most people today are also on the lookout for viable insurance policies to ensure the security of their loved ones. In this regard, it is easy to comprehend the growing popularity of Unit Linked Insurance Plans (ULIPs). This novel variation on the basic formula of life insurance was first introduced in India by the Unit Trust of India in the 1970's.

What is a ULIP?

A ULIP, or Unit Linked Insurance Policy, combines the most advantageous aspects of investment as well as insurance, and rolls them into a single entity that takes into account both maximum returns as well as financial risk cover. How a ULIP works is that a certain amount of the policy holder's premium is reserved as life cover, whereas the remainder is invested in equity and debt securities with the aim of wealth creation.

What are the advantages of a ULIP?

Not only do ULIPs assure a certain risk cover for the policy holder's beneficiaries, they also provide them with the option of selecting high, medium or low risk investment options, while also allowing the insured to switch between the same.

Switches can be made at no cost,provided they are limited to a predetermined number.

Policy holders can either adopt aggressive investment strategies, gearing their investments towards lucrative equity markets, or in case of low-risk investors, in bank deposits and debt securities. ULIPs also allow for 'top ups', which means that the policy holder can make additional contributions over and above the regular premium.

While they are long-term investments, ULIPs offer policy holders the option of making a partial withdrawal after the first five years. Only the stipulated minimum amount of capital must be retained in the policy holder's Unit Liked account. This lends ULIPs a certain degree of liquidity which many other long-term investment options lack, giving it a significant edge.

Unlike simpler term life insurance policies, ULIPs hold a significant 'cash value' as they provide the policy holder not only tax benefits but also an assured return at the time of maturity.

ULIPs are viable options for investors who wish to partake in investment activities without actually buying into the stock market, with the added benefit of risk cover in the unfortunate event of the insured individual's demise. This two-fold benefit is the reason for the rising popularity of ULIPs in today's capital market.

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